After healthcare failure, Republicans face similar divisions on tax reform

WASHINGTON (Reuters) - Republicans in Congress unveiled a fiscal 2018 budget plan as a first step to major U.S. tax reform on Tuesday, only to face the same divisions between conservatives and moderates that helped killed their efforts to replace Obamacare. The $4 trillion spending blueprint, released by the House of Representatives budget committee, could become a new flashpoint for Republican in-fighting because it links future tax cuts for businesses and individuals with $203 billion in mandatory spending cuts that would reduce benefits for the poor. The Republican push to repeal and replace the Affordable Care Act, widely known as Obamacare, collapsed in the Senate late on Monday after a tug-of-war between party moderates who wanted to preserve healthcare benefits for lower-income Americans and conservatives who wanted to scale them back. On Tuesday, House Republicans disagreed over the budget proposal in terms that could foreshadow a replay of the Senate healthcare debacle when lawmakers turn to tax reform. Representative Mark Meadows, chairman of the conservative House Freedom Caucus, said the budget measure would not get enough conservative votes to pass the House without bigger cuts to programs that the government is required to fund by law. "It's still short of what it needs," Meadows told reporters. On the other side, Representative Charlie Dent, a leader of the moderate Tuesday Group, called for an agreement with Democrats to establish higher spending levels for discretionary programs. "If we move too much in the mandatory area, then it will make tax reform that much more difficult to get. It's that basic," Dent told Reuters. House and Senate approval for a fiscal 2018 budget agreement would unlock a vital legislative tool called reconciliation that allows Republicans to pass tax legislation in the Senate with a simple majority. But the Senate's inability to pass healthcare legislation even with reconciliation raised questions about how useful the strategy really is. One corporate lobbyist said some Senate Republicans privately question the reconciliation approach backed by House leaders, saying it appears to be "poisoning the well" in the Senate by alienating Democrats who might otherwise support tax legislation. Republicans have only a 52-48 Senate majority and can afford to lose no more than two votes on Republican-only legislation, with Vice President Mike Pence providing the tie-breaking vote.

DEMOCRATS' DELIGHT Democrats were delighted by the Republicans' failure on healthcare and called for bipartisan discussions. "Using a partisan approach for the major issues of our time -- healthcare and tax reform – is a prescription for trouble," Senator Ron Wyden, top Democrat on the Senate Finance Committee, said at a tax reform hearing on Tuesday. Senator Orrin Hatch, the panel's Republican chairman, acknowledged that Republicans would also have difficulty passing tax reform legislation, even using reconciliation. "It's going to be difficult to do. Hopefully, we can get that done," Hatch told reporters. The Senate is under no obligation to accept the House budget language that would ultimately tie tax reform to mandatory spending cuts in the same piece of legislation. Senator John Thune, chairman of the Senate Republican conference, said senators will decide whether to add the same language to their own budget resolution. After six months in power, President Donald Trump has yet to score a major legislative victory, though financial markets have rallied since his election on expectations of pro-business measures, including tax reform and infrastructure spending. Pence, speaking to a gathering of retailers in Washington on Tuesday, reiterated that Trump plans to slash the corporate income tax rate to 15 percent from 35 percent. But the failure of the healthcare bill in the Senate created uncertainty in financial markets, with the dollar hitting its lowest level against the euro in more than a year on Tuesday. "The healthcare bill not coming through raises some continued concerns about the ability of Washington to push through favorable fiscal policies," said Lisa Kopp, head of traditional investments at U.S. Bank Wealth Management. The S&P 500 stock market index has gained about 15 percent since Trump's Nov. 8 election, while the benchmark Dow Jones industrial average has posted one record high after another on optimism of a Trump tax reform and other pro-business policies. The budget committee will hold a hearing on the budget resolution on Wednesday. Representative Diane Black, the panel's chair, said the measure has the votes to reach the House floor.

(Additional repporting by Amanda Becker and Ginger Gibson in Washington and Tanya Agrawal in New York; Editing by Kevin Drawbaugh, Kieran Murray and Leslie Adler)